Portfolio Diversification Policies: Alternative Asset Classes

Alternative investments have been debating for a long time. The main issues have been the definition of alternative investments and the weight of these asset classes in the portfolio diversification strategies. Historically alternative asset classes have been more efficient to achieve a better optimal portfolio risk-return trade-off to reward risk and have proved to be sufficiently uncorrelated to equity and fixed income asset classes. The benefits deriving from the inclusion of alternative assets in a financial portfolio cannot be understood without taking into account the four moments of return distribution. This chapter, therefore, analyses the construction of optimal portfolios following the multiple objective model developed by Davies, Kat, and Lu (DKL), where investors can decide the level of exposure to each of the four moments of return distribution.